I've been writing about the busy, sometimes dangerous intersection of real estate, finance and architecture in the lives of cities for more than two decades, not only as a Financial Columnist for Forbes but also as a contributor to publications from Barron's and The New York Times to architecture and design magazines. My fascination with these often misrepresented subjects led me to create a magazine, GRID, and a Web site, TheSlatinReport.com, and now finds me as Editorial Director of Real Capital Analytics, a leading global real estate research firm.

8/17/2011 @ 1:02PM1,208 views

Like Gold, REIT Nuggets Are In The Dirt

Is it the end of the line for REITs – or another beginning? An article in yesterday’s WSJ proclaimed “Commercial Real Estate Losing Haven Appeal,” noting that REIT shares have turned volatile and been on a downward trajectory in recent weeks, along with everything else, instead of bucking the trend and rising as they have for the past two years.

I say, bully! Time to buy on the slide, although selectively. That’s why I took the leap last Tuesday morning and grabbed up Cohen & Steers’ Realty Majors fund ICF (ICF), to cover all the top dogs – and then hedged that with some somewhat more mangy critters with real growth potential – and real risk.

I picked up a limited-service hotel company, Summit Hotels (INN), which is focusing hard on the low-budget sector that everyone’s ignoring; Cogdell Spencer (CSA) a cheap and sluggish but high-yielding medical office building owner that will either grow or get swallowed by one of the other voracious health-care companies out there; and high-yielding, small-cap LTC Properties (LTC) that specializes in the burgeoning single-tenant world but is still a bit under the radar and is maneuvering for growth.

None of these are trophy building buyers or owners, and all of them will take time to achieve growth, but in the meantime they’ll pay a good dividend – from 2.7% for INN to 9.1% for CSA. Of the three small companies mentioned above, the one that is most likely to become a major force in its niche is Summit.

By the way, for those pooh-poohing companies that only own second or even third-tier assets, it’s worth remembering that SL Green (SLG) got its start as an owner of Class B office buildings and Vornado (VNO) grew after gaining control of Two Guys, a dusciybt retauker. Now it owns some of the best office buildings and retail space in New York and Washington, DC, and SL Green is the biggest private office landlord in New York City.

It’s true that bricks and mortar aren’t gold, but the supply demand equation is not dissimilar – except that property is not a commodity. Yet in some markets, the supply of top-quality office and apartment buildings is nearly as difficult to grow as the amount of gold in the ground. The cost of converting dirt into income-producing space, and whether the going demand will support that expense, determines how likely it is that the space will be created and what the charge it will bear for the end user. Like gold, demand for space waxes and wanes, of course, and no one ever thought (I hope) of pegging the dollar to the price of office space or a flagship storefront on Fifth Avenue.

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